Today, with rising environmental and stakeholder pressures, companies must integrate Environmental, Social, and Governance (ESG) principles into all aspects of their operations. At the center of this transformation is the circular economy, a shift from merely making and using products to creating a cycle that prioritizes using, reusing, and recycling them.
According to the Circularity Gap Report, applying circular economy principles across five sectors, cement, aluminum, steel, plastics, and food, could reduce global greenhouse gas emissions by up to 9.3 billion tonnes by 2050. This is roughly equivalent to eliminating all current emissions from the global transport sector.
This shift is largely driven by supply chains, which, especially through Scope 3 emissions, can account for over 80% to 90% of a company’s total environmental impact in many industries.
Understanding Circular Economy Principles in the Supply Chain Context
From Linear to Circular: A Fundamental Shift
The traditional linear model involves taking resources, making products, using what is needed, and discarding the rest. Due to limited resources and increased waste generation, this model is becoming harder to sustain.
In contrast, the circular economy adopts a cycle that does not end in waste. Products are kept in use longer and waste is minimized, allowing nature to recover.
Circularity relies on the following fundamentals:
- Reduce: Use resources efficiently to reduce overall consumption.
- Reuse: Repair, resell, or repurpose items to extend their lifespan.
- Recycle: Reprocess or exchange discarded items for new uses.
- Regenerate: Restore ecosystems to increase biodiversity and support natural regeneration.
Read more: Palm Oil: Addressing Deforestation and Human Rights Risks in the Supply Chain
Why Circular Economy Is an Important Aspect of ESG Strategy
According to the UN International Resource Panel, a significant share of the world’s carbon emissions and nearly all biodiversity loss are linked to natural resource extraction and processing. By adopting a circular approach, companies can manage ESG risks and unlock new value.
Circularity offers the following benefits:
- Environmental: Threats such as resource depletion and pollution can be managed through greater use of recycled materials.
- Social: Local reuse-based approaches can help address social concerns related to material sourcing.
- Governance: Circular systems improve transparency and safety in supply and disposal chains.
Thus, circular supply chains reinforce ESG principles and support long-term business stability, building trust among investors.
Ensuring Sustainable Supply Chains
Sustainable innovation in supply chains involves embedding environmental, social, and governance considerations into operations through new technologies and methods. ESG integration is shifting from merely reducing harm to redefining value creation.
New trends in sustainable supply chain innovation include:
- Transparent sourcing enabled by technologies such as IoT and blockchain
- Use of Artificial Intelligence (AI) for emission tracking
- Supplier sustainability rating systems
Real-world Examples of Sustainable Innovation in Circular Supply Models
- Closed-loop Logistics: H&M allows customers to drop off old clothes at its stores, which are recycled into new designs. This reduces textile waste and the need for virgin raw materials. However, such initiatives must be supported by effective systems to achieve real circularity.
- Recycled Packaging: Much of Unilever’s packaging is recyclable or compostable, and the company aims to make 100% of its packaging recyclable or compostable by 2025.
- Reverse Supply Chains: HP and Dell recover used electronics for refurbishment or material reuse, reducing e-waste and conserving resources.
Circular supply models not only protect the environment but also help secure resource availability, enhancing supply chain flexibility and cost-efficiency.
Read more: What Are ESG Scores? – Investors’ Complete Guide to ESG Ratings
Key Levers for Financial Institutions to Drive Circular Supply Chains Financing Sustainable Supply Chain Models
Financial institutions can promote circular models by offering loans and other financial instruments.
- Green loans fund projects aimed at environmental protection, such as upgrading waste treatment facilities.
- Sustainability-linked bonds (SLBs) reward companies for achieving defined sustainability targets, such as reducing waste or carbon intensity.
In 2023, HSBC provided a $50 million green loan to a Southeast Asian logistics firm to establish a circular packaging and return system—a strong example of how banks can scale sustainable innovation.
High initial costs for circular infrastructure and technology can be offset by financial incentives, making adoption easier for small and medium-sized enterprises (SMEs).
Embedding ESG Metrics in Investment & Lending Portfolios
Banks and asset managers can incorporate circularity-related ESG indicators, such as:
- Use of recycled materials
- Extended product life cycles
- Waste generation and disposal impacts
Challenges and Opportunities in Scaling Circular Supply Chains
Barriers: Cost, Data, and Stakeholder Misalignment
Several challenges hinder the scaling of circular supply chains:
- Cost Barriers: High upfront costs related to redesigning processes, retooling, and managing reverse logistics
- Data Challenges: Incomplete or inconsistent supplier data makes it difficult to evaluate circularity and ESG performance
- Stakeholder Misalignment: Divergent priorities among suppliers, customers, and investors can slow progress
Moreover, the absence of universal standards for circularity metrics complicates reporting and decision-making across regions.
Opportunity for Long-term Value Creation
Despite these challenges, circular supply chains offer substantial long-term benefits:
- Resilience: Circular systems reduce dependence on volatile global supply chains
- Compliance: Circular practices prepare companies for regulatory changes, such as the EU Circular Economy Action Plan
- Brand Value: Sustainability is critical for Gen Z consumers, who prefer brands with strong environmental and social commitments
What Financial Institutions Can Do Actionable Steps Toward Sustainable Circular Supply Chains
To support this transition, financial institutions can:
- Develop Circularity Assessment Frameworks: Integrate metrics to track and analyse circularity into investment decisions
- Collaborate with Clients and Suppliers: Encourage clients and suppliers to adopt circular practices in supply chain planning
- Invest in Circular Economy Funds: Channel capital into funds focused on sectors such as construction, packaging, and electronics
Role of Regulation and Reporting
Key regulations encouraging circularity include:
- Corporate Sustainability Reporting Directive (CSRD): Requires large companies in the EU to disclose detailed information on sustainability matters, including circular economy practices such as resource use, waste management, and product lifecycle impacts.
- EU Circular Economy Action Plan (CEAP): A core component of the European Green Deal, CEAP sets measures to promote sustainable product design, reduce waste, and stimulate circular business models—particularly in electronics, textiles, plastics, and construction.
- EU Taxonomy Regulation: Establishes criteria for sustainable economic activities. It includes circular economy objectives such as the transition to sustainable resource use and waste prevention.
- International Sustainability Standards Board (ISSB): Develops global sustainability disclosure standards, including expectations around value
Read more: Understanding the ESG Regulations Landscape
chain emissions, resource efficiency, and waste—encouraging companies to account for circularity-related risks and opportunities.
As reporting requirements grow, transparency becomes essential. Companies must show tangible progress, not just commitments.
Conclusion
ESG considerations are essential to accelerating the transition to a circular economy—a necessity for long-term business success and profitability.
With growing resource constraints and evolving regulations, companies that fail to adopt circular models risk operational and reputational setbacks. In contrast, those integrating ESG and circularity into supply chains can cut costs, meet regulatory requirements, and earn stakeholder trust.
Financial institutions must move beyond financing, becoming active partners in reshaping global supply chains for sustainability. Aligning capital with circular practices can foster inclusive, stable, and environmentally sound growth.
